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Carbon may come cheaper than first predicted when California’s cap-and-trade program finally gets rolling.

Craig Miller

Analysts at Thomson Reuters have dropped their projections of what polluters would pay for emissions permits from $40 to $36 per metric ton of CO2-equivalent gases.

Emilie Mazzacurati, who heads the firm’s North America Carbon Team, says pushing back the compliance date to 2013 and fears of a double-dip recession are behind the 10% trimming from its prior forecast.

Analysts say they expect greenhouse gas emissions to decrease in a sluggish economy. In 2009 and 2010, California’s emissions from power plants dipped by 12% due to a combination of milder temperatures, leading to less air conditioning demand, and a lull in manufacturing.

The trading price assumes that California goes it alone in cap & trade, although two Canadian provinces are expected to join the market eventually. Rules for the State’s cap & trade program have to be finalized by the end of October.

California’s cap-and-trade program took another baby step toward fruition on Monday, with the release of the state-appointed Economic and Allocation Advisory Committee’s final report on implementing carbon regulation.

Stopping just short of recommending a 100% auction of emission credits, the report, which is non-binding and was written to help the California Air Resources Board develop an economically sound cap-and-trade program, advises the state to sell off the majority of its carbon permits to emitters — with a few exceptions. Industries that “rely heavily” on carbon-based energy or compete directly with firms that do not face carbon regulation, the report says, should be “provided with assistance” or given funds earned from the auction.

The report pointedly advises against handing out free permits to utilities. Although the state’s utilities will almost certainly pass increased costs onto customers, the committee predicts that the price spike will provide an incentive for Californians to start saving energy. The committee’s press release says the report takes a “household friendly” approach to cap-and-trade, recommending that at least 75% of the proceeds from selling carbon permits be returned to households through either tax cuts or direct financial transfers.

Even before the report was released on Monday, the looming possibility of a carbon permit auction was causing anxiety in industrial circles. The AB-32 Implementation Group, an organization that aims to protect California business interests, claimed last week that if the price of carbon is set to $60 per ton, “large employers could be subject to an ‘Auction Tax’ of up to $143 billion by 2020.” Environmental groups have been urging the Air Board to auction off all the carbon permits initially offered.

In a written statement, Governor Arnold Schwarzenegger responded to the committee’s report, saying “the best program will be one that returns value to the people through tax cuts, rebates or dividends, and I applaud the Committee for recognizing those options.”

Here’s a quick run down of the rest of the report’s key recommendations:

Protect Low Income Households

The report recommends returning some of the auction’s profits to low income households, since such households tend to spend a greater percentage of their income on energy.

Invest in a Low Carbon Economy

The committee recommends that the state create an independent Investment Advisory Board to help make it reach its low carbon targets.

Simple Auctions

The state’s carbon permit auctions should simple and allow the public to sell permits in the auctions along with the state.